Real Estate Franchising: Its History and Future

Franchising: Rebound or Rebirth?

A Colorful History

The early 1970's was a time of upheaval in the real estate business. Following earlier launches by Gallery of Homes and Red Carpet, two real estate brokers, Art Bartlett and Marsh Fisher, formed their own franchise in Orange County CA with just seventeen offices. Its futuristic name, Century 21, quickly became a household word, mimicked shortly thereafter by ERA, Realty World, Realty USA, and an assortment of other logos long forgotten. I nostalgically like to recall this wild, exuberant real estate time as the "Battle of the Blazers", having been actively engaged in the "upheaval" (and gold uniform) myself.

Franchising, whether it's burgers, mufflers or real estate offices, is not a new phenomenon. Actually, it's a business model that's at least 2000 years old. The franchising of real estate offices began in the late 1940's (with Gallery of Homes), but expanded rapidly in the early 70's with great fanfare and success. It was then, before Watergate, the Iran hostage crisis and long gas lines, that the bland business of 1950's "mom and pop" real estate took on a multi-colored complexion -- each franchiser sporting its own fluorescent "career apparel", taller- than-life Colonial post sign, along with an assortment of electronic gadgetry to wow the still MLS book-carrying real estate world (ERA Real Estate's heavily hyped facsimile machine comes to mind)! Local, grandfatherly real estate companies suddenly turned bright red, mustard gold, and even peacock blue! Thirty-second TV commercials quickly replaced the local newspaper as the primary vehicle to capture the hearts and minds of consumers and sales people. New agents got trained after they got their licenses... on practical but oft-ignored topics like prospecting and "handling objections". Sales training got salespeople off "floor time" and into the streets... many began to "farm" neighborhoods, signing up for client follow-up mailings and other "stay in touch" ways of establishing a long-term "book of business". By 1977 over 5000 "independently owned and operated" real estate brokerages had joined a franchise -- each business owner looking for something new, different or missing from their provincial real estate "status quo" (some joined merely to protect it). In 1979, Century 21 franchisees sat down for a Guinness world record breaking lunch in Las Vegas, consuming 14,999 chicken breasts in less than 59 minutes (I opted for a shrimp cocktail at the blackjack table instead).

All of this hype, blazers and training worked. Local brokers (and more than one state real estate commission) soon conspired against these perceived "enemies", viewing the new franchisers as West Coast carpetbaggers sucking away local commission dollars...or worse possibly showing them up as parochial dinosaurs, with their superior training, promotional rallies and conventions, and organized marketing programs. Still, the franchises kept on, adding thousands more zealots to their numbers, ultimately attracting wealthy suitors from unrelated industries (Sears, TWA, Control Data and others). Starting out with only borrowed money, a lot of guts and good luck, Bartlett and Fisher sold their eight-year-old franchise company for $91 million in 1979 (I remember the smiles and tears on their faces when they made the "surprise" announcement). Coldwell Banker joined the franchising fray in the early 80's, as did Merrill Lynch, Better Homes & Gardens and Prudential. Soon franchise membership topped 15,000 offices (Century 21 had 7500 of them). It was a heady time then, with more economic peaks than valleys, and hardly any government regulation to get in the way of these once financially shaky (suddenly rich) entrepreneurs.

Today, of course, the list of real estate franchisers is fewer, but significantly stronger -- dominated by Wall Street conglomerates (Reology, GMAC, Prudential). Ironically, the "boogie men" that first scared 1970's and 80's brokers into even considering acquiring a franchise, viz., big business threatening to enter the real estate business, have today become the industry's biggest franchisers!

By the late 1980's and 90's, the once franchise "cults" had lost much of their magic and newness, forgetting that their already trained, now successful sales associates had matured, forming mega-teams with their own hired assistants, requiring less supervision but more ego-gratification and marketing support. Thus, "personal marketing" entered the real estate lexicon, as did new agent-focused franchise models like Re/Max and Realty Executives. Shocked or deluded, traditional brokers had to adapt by adjusting their "splits" or getting back into personal production in order to keep the doors open. Few made these changes in time, or that dramatically, resulting in further disruption to the old "mom and pop" business model. This "agent centric" model, though twenty-plus years old, remains dominant today.

As a result, six major real estate franchises account for an estimate 65% of all real estate commissions. And that gluttonous market share continues to grow with industry shaking mergers, acquisitions and price multiples that boggle our minds and the trade publications almost every other month. Losing the luster?

Despite their obvious financial prowess, the reputation and appeal of real estate franchises seemed to regress as the new millennium arrived, especially to the very "independent" broker still looking for help in building a competitive, profitable business. Many of the old line franchises that once boasted of superior training and management had dropped or altered their original programs and services, particularly local training for new agents. Career apparel was sent overseas; technology took its place! The Internet was becoming the sexy (cheaper) substitute for most services. Local field consulting became sporadic or non-existent since very few franchisers had consistent, identifiable operating systems to point to anyway. Accordingly, franchised brokers today are free, even encouraged, to "do their own thing" within the local marketplace. Although they still profess having "proprietary systems" for marketing and managing, most franchises have become "brand name" organizations, preferring to provide advertising, promotions, referrals and "strategic alliances" as their main point of sale and differentiation, rather than live training, recruiting and management support for the individual offices.

What generally suffers from all this "freedom" and inconsistency, however, is great customer service, which unfortunately can vary widely, depending how much latitude managers give their so-called "independent contractors", some of whom are great, others good, but too many downright awful in their knowledge and service. Such disparity requires added scrutiny by customers and potential sale associates who, rather than rely on brand-value, must differentiate between offices and agents carrying the same brand name: Is it a growing office? A financially stable office? A full service office? A discount office? Is my agent well trained? Is the office pursuing a consumer-centric or agent-centric business model? Because of these inconsistencies (and others), a franchise's reputation (and potential use) today is more likely judged by its worst franchise members than its best!

To be sure, the growth and success of franchises over the past decades has not gone unnoticed by the "independent" real estate community. Early on, a few (very few) of the larger independent firms accepted the franchise challenge and began to grow exponentially themselves - offering similar training, recognition and marketing programs, doubling or tripling their sales force and productivity in the process. Referral networks emerged for broker-to-broker and corporate business, but also for think-tanks and psychological support. For these large mega-firms, the "join or be buried" threats of the early franchising sales teams have not materialized; indeed in most large markets, the #1 or #2 broker remains a large independent, fiercely proud and competitive, but also trying to work out his or her exit strategy. And whether they intend to sell the business (most likely to one of the conglomerates) or literally die at their desk, each one of these mega-brokers recognizes that tough franchised competition is not going away... that even better models and systems are needed... and that GROWTH for any real estate company is no longer an option.

"Branchising" - the new phenomenon

Somewhere far behind these broker battle lines huddle the rest of the real estate industry, either distracted or oblivious to the claims of "Who's #1" locally or nationally, but instead focused on more fundamental issues for any size real estate brokerage:

• Finding good sales people
• Training that sticks
• Keeping the ones I want to keep
• Getting them to prospect and list on their own
• Making them less dependent on me
• Making me less dependent on the few top producers who hold me captive
• Losing fewer callers... and
• How do I get out of all this! 

This list of management frustrations goes on, of course, and includes other perennial sore spots like working with "third party" relocation companies, selling more mortgage and title product, conducting sales meetings, reducing classified ads... and motivating the seemingly unmotivatable! So, in spite of new technology and a slew of new real estate designations, the challenges of brokering haven't changed all that much since the early 1970's. Nor have the solutions. Just different competition, more regulation ... and a much smarter consumer!

Real estate offices, no matter what their current size, need to grow in several ways (to me remaining small is a bad choice). Managers can recruit and develop new agents, improve current agent productivity, add ancillary revenue sources; OR they can acquire production through "raiding" another company's sales associates or purchasing other real estate companies altogether. They can also expand into brand new markets through branch offices, thus insulating themselves from local market downturns.

The proselytizing of sales associates, however distasteful, continues, although many brokers are dismayed at just how inexperienced, unprofitable and "high maintenance" many of these "experienced" old pro's really are! Mergers and acquisitions, on the other hand, have had their successes, particularly with so many fifty-some real estate brokers looking for a way out of the business. And while the pickings for office acquisition are plentiful, the list of really profitable real estate companies is slim. Real estate companies are supposed to be evaluated based on their past and current net profits, not on their future potential. The biggest company assets, i.e., the sales agents, unfortunately have feet, and can and will walk away if they feel slighted or overly controlled. Amazingly, these proven formulas and agent realities have little meaning in today's purchasing frenzy, where price multiples paid by large franchisers and mega-firms have doubled, tripled, even quadrupled, based on what ought to be, not what is.

Opening up branch offices in new markets, on the other hand, seems to have more successes than failures, particularly for the larger independents, which continue to use their many branches in leveraging more relocation business, and more effectively supporting new services such as mortgage, insurance and title searches. There are also "backroom" efficiencies to be exploited. As branch office expansion moves further away from the company's "motherland", however, certain weaknesses and deficiencies to this strategy become apparent - although markets have very much in common, each one has differences which cannot be ignored or easily modified, especially from the outside, by perceived outsiders. Change comes slowly in the real estate business and best emerges from within; meaning, sometimes it's better to join the club rather than invade it!

The newest iteration of real estate franchising takes these realities into account, and was first introduced in the late 1990's by a handful of independent brokers seeking to expand into new, contiguous markets, while taking advantage of entrenched local experience and customer bases (not to mention someone else's capital). "Branchising" is in, with Weichert, Realtors^®, the country's largest independent, leading the way among a half-dozen or so other regional companies throughout the country. The term "branchising", (another entry to the real estate lexicon) while not necessarily legal or accurate, sums up a different "feel" or relationship for both the franchiser and those "affiliates" assuming the company's brand name, signage and bigger reputation. On the surface at least, local brokers receive the same benefits as the company-owned offices, being viewed more as "partners" than subservient franchisees. The company does not compete locally with its franchise members, nor does it offer competing franchise brands to those across the street. The "feel" seems more interdependent than self-serving or parochial, and is attracting new inquiry from diehard independents, and disenchanted members of other franchises longing for the "old days", and whose contracts are up for renewal. Lending a reputable name and sponsoring occasional training and sales rallies, however, will not be enough for "branchisors" (including Weichert) to attract enough new members; not without a clear return to the "roots" of franchising, namely:

1. Planning
2. A focus on listings
3. Continuous recruiting
4. Extraordinary (not more expensive) marketing
5. Managing activities not just results

However, good thoughts do not necessarily lead to a franchise sale. Nor should "branchisers" attempt to compete with "brand name" majors in media advertising. To be different and actually make a difference, the successful "branchiser" must be able to point to, promote and support clearly defined operating systems for marketing and managing a profitable real estate office, along with "hands on" services such as recruiting and local training. In addition, they can offer a host of new programs and benefits hardly imagined when the first career apparel was brought out.

At Weichert Real Estate Affiliates, Inc., for example, franchised offices receive qualified leads each week from Weichert's fulltime corporate recruiters. Similarly, the Weichert Lead Network utilizes the latest technology to locate, capture and qualify visitors to its Web site. Associates can tap into the company's extensive "one stop" services for quick mortgage approvals and settlement services, including insurance, title and "connections" services. And Weichert Relocation Co., the country's third largest "third party" company, includes Weichert^® franchise members among the preferred recipients of its worldwide corporate relocation business. These services, both futuristic and old-timey ones, are slowly but steadily changing the opinions of hardened franchise skeptics, brokers and competitors, who now see this type of "hybrid" affiliation as a viable business strategy.

Business format franchise

To be successful, a franchise, whether it's in hair care or submarine sandwiches, should be a "business format" franchise - offering far more than a well marketed brand name. It's the operating system underlying that brand that helps ensure a consistent quality service delivery and returning customers. Buyers, sellers, investors, vendors, even other sales agents should know in advance what to expect before they enter your door or call up on the telephone. It is service/support (and enforcement) of these systems and standards that ensures that the brand's reputation is not tarnished. Ask yourself and others what they think of certain franchise brands today, and you'll likely hear a wide range of adjectives, from great to awful, depending on how clearly and consistently the particular franchiser defines and reinforces its operating system and service. A re-read of "Under the Golden Arches" should be required for anyone offering or considering affiliating with a franchise today. The business format franchise model, in my opinion, is essential.

Alone or affiliated?

Today's real estate challenges haven't changed that much since the 1970s, although the solutions to these challenges are more available and affordable. The Internet, for example, has forever altered how we advertise properties, how we prospect, and how we "incubate" our customers. But such a "tool" has allowed our people to become more effective, not be replaced.

While traditional franchises continue to dominate the real estate scene, they are doing so more by acquisition than by adding additional, non-owned, franchised offices. Invariably, the "majors" must answer to their stockholders and to quarterly earnings projections and Wall Street analysts, making long term investments and solutions in new programs and staffing extremely difficult. Any return to "hands on" systems and services seems economically infeasible. Other players have entered the fray, but appeal more to individual agents readying for retirement than building equity for the business owners.

Weichert, Realtors' systems and services were firmly established long before franchise expansion was launched less than three years ago. They continue to be refined, especially with recruiting, mentoring and paying our sales associates. Testing these systems (old and new ones) within our own company stores is seen as an added benefit to the nearly 100 franchised offices that get benefit of these refined or new programs only after "bugs" have been eliminated. Being actively engaged "in the business" allows Weichert and other "branchisers" to investigate new business models and technology faster and without "committee approval".

The best exit strategy, in my opinion, is one developed before you open your office doors for the very first time. It's to rapidly grow your business so it runs well (and profitably) without you. For most brokers and associates, this worthy goal should include serious consideration of some form of affiliation. For many, franchising can provide a unique opportunity to grow your business, without sacrificing the pride and benefits of individual business ownership. Growing alone can be very lonely.